The Illusion of Toothless Sharks

Every year, the East coast of Florida witnesses a great migration of sharks. The water just off the beaches is thick with them.

A trustworthy authority would close the beaches for public swimming, posting warnings signs all over the place. A smart person would listen to the warnings and stay out of the water until the danger has passed.

But what would you do if the lifeguard at the beach took down all the warning signs and told you the sharks swimming off that beach where all harmless? Would you get into that water?

And what would you say of a person who does go swimming with the sharks? Would you think they’re brave? Maybe they’ve seen evidence to back up the lifeguard’s claims…? They could be thrill seekers. Or they could just be idiots…

I vote for the latter, which is why it astounds me that investors are practically clambering over each other to get into the markets…

We’re barely through the period when the U.S. financial system melted down… major banks and corporations failing left, right and center… real estate collapsing… and stocks crashing.

We’re not yet through the period of Europe’s melt down… Cyprus being the latest (and not last) in a line of one sovereign debt crises.

China has the greatest real estate bubble ever… and it’s aching to burst.

Emerging countries are slowing as commodity prices and their exports keep falling.

And Japan is in a coma economy 23 years after its stock and real estate collapse.

This is a high risk economy, second only to the 1930s. This is like the Atlantic waters teeming with sharks.

Yet central banks the world over have said everything’s fine… they’ve removed the teeth from all the dangers lurking in the water… it’s safe to swim. And people believe them. They’re being swept up by the illusion!

So, what do governments and central banks do? They work to make the illusion even more elaborate. “We’re not addicted to debt,” they say. “We don’t have a problem,” they say. “We’ll just take more of the debt drug to keep the bubble going and everything will turn out alright in the end,” they say.

They’re idiots!

Central banks are flooding their economies with free money, like debt, but cheaper than ever… money they’ve created out of thin air. They’ve pinned their plans to the hope that their economies will return to normal if they can just nurse them over this flu, which we caught in 2008.

Hope is NOT a strategy.

As I’ve said time and again, most of the developed economies of the world will not return to normal until at least the early 2020s. Many never will. And we have unprecedented debt and entitlement burdens and slowing, totally predictable demographic trends to thank for that.

We found ourselves drowning in the greatest debt and real estate bubble in history because the government manipulated the markets to create an illusion of no or low risk in an increasingly risky environment.

Financial institutions took such signs of low risk as the go ahead to speculate wildly, so they lent at levels that would seem absolutely crazy at any other time. When banks and investors perceive low risk, they take higher risks, it’s that simple.

Low interest rates, government guarantees, lenient lending and ratings standards, and B.S. insurance all create that illusion. They feed the bubble that always bursts.

The worst part in this unique debt cycle is that governments are, for the first time in history, extending that illusion with endless money printing. They’re pushing down short- and long-term interest rates further, adding to the illusion that there’s no risk here… that they’ve got our backs.

That’s like saying that lifeguard has our backs while we swim in shark-infested waters.

I don’t know about you, but I’m preparing for a greater debt crisis and crash between mid-2013 and early 2020. I urge you to do the same.

Protect your capital and what you have before you worry about chasing riskier investments. The Fed is doing everything in its power to get you to take those risks. That’s the only way it can keep the bubble inflating.

But that will lead you to slaughter, just like it did in 2008.

Get your toes wet. Hell, even get your calves wet. But don’t go swimming under the illusion there are no sharks beneath you.Harry

I’ve written recently on the declining correlations among individual stocks. This can make stock picking a lucrative venture, if you know how to separate the wheat from the chaff. Of course, you also have to be nimble enough to hit the eject button and pull your chute as the Fed’s market-propping efforts begin to fail.

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.

About Us

Economy & Markets Daily is the first e-letter of its kind that uses the power of demographic trends and purchasing power to accurately identify economic and market boom and busts.

We believe that knowing what consumers are going to buy next (purchasing power)... or what they'll stop buying soon... is the best way to protect your investment portfolio, maximize your returns, and make smart business and financial decisions.

Each week day, Harry Dent, Rodney Johnson, and Adam O'Dell share with you their views on demographic trends, their market research, their economic research, the housing market, economic cycles, market cycles, business cycles, and the looming economic collapse and market crash.